Chinese economy heats up global crisis debate

China rolled out $580bn stimulus plan in 2009. (AFP)

Global leaders and bankers will be looking for firm signs at the Davos forum this week of China's determination to control the hot money pouring into its economy.

A year after China's Premier Wen Jiabao sternly lectured the United States and other western nations at the World Economic Forum for causing the financial crisis, markets are now jittery over "asset bubble" warnings around his country.

With China and India, two of the hottest economies around, comments by Chinese First Vice Premier Li Keqiang and top Indian cabinet member Kamal Nath will be seized upon at this year's forum which starts in the Swiss resort tomorrow.

Chinese officials have already indicated that the focus of the speech by Li, a senior member of the Communist Party's ruling politburo, will be the financial crisis and reforms.

The world's major emerging economies, China and India have survived the storms of the past two years better than their Western rivals. But the state of China's property and stock markets and its soar away growth – 10.7 per cent in the fourth quarter of 2009 – has heightened inflation fears which has already forced the Beijing government to cut back on bank lending to deter a consumer splurge on cars and property.

Inflation is also rising in India where increased manufacturing has spurred a new growth surge in recent months. India's central bank, the Reserve Bank of India, meets on Friday and is expected to drain some of the liquidity pumped into the financial system last year to encourage lending, analysts said yesterday.

Many institutions see the frantic activity in the two economies producing storm clouds, with China by far the bigger risk.

"The potential formation of a new financial market bubble in the region is an increasing cause for concern," the World Bank said referring to Asia in its annual report released last week.

International Monetary Fund (IMF) Chief Dominique Strauss-Kahn made the same warning.

Davos hosts, the World Economic Forum, said in its annual report said that China's economy is on a "very unbalanced growth trajectory". Economists say China runs the risk of a sharp recessionary correction, which could hit recovery around the world, particularly the United States, its main trade partner.

But many also praise China's course in steering the through the crisis with its $580 billion (Dh2.13 trillion) stimulus plan, and there are divisions over how likely a new crisis is.

"A crash landing is a worry but not a high probability at the moment," said Nariman Behravesh, Chief Economist for IHS Global Insight, who will be speaking at Davos.

Behravesh predicted more credit controls to rein in the hot property and stock markets. "They have to be a little careful, China's growth is uni-dimensional as it comes from the government's capital spending. They need policies to encourage consumer spending," he said.

But Peter Morici, a professor of international economy at the University of Maryland in the United States, said: "You never really know when a bubble is going to burst. As long as they can keep up 10-11 per cent growth they can maintain that bubble. Its when the growth comes down that the trouble starts."

Morici has been an outspoken critic of China's economic tactics including the impact on the US of keeping China's currency artificially low to keep its exports flowing to the West.

"In China, the fixed rate for the yuan against the dollar requires Beijing to print lots of yuan to sweep dollars off foreign exchange markets and return to China as payment for exports. This causes inflation, too easy credit and an asset bubble."

 

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